This site requires a more recent version of Adobe Flash Player to function properly. Go here to get Flash.

Trefis's graphical modelling tools require Flash, but here's a preview of some of the content you'll see once
Flash is enabled:

Investment Overview for Schlumberger Limited (NYSE:SLB)

${header:potential}

Below are the key drivers of Schlumberger's value that present opportunities for upside or downside to the current ${trefisprice}:

Middle East and Asia

Middle East/Asia EBITDA Margins: The EBITDA margins for Schlumberger from its oil services operations in the Middle East/Asia region have historically been the highest among all its operational regions ruling at levels of 30%-35%. We expect margins to decline in 2015, due to lower exploration and production spending on the back of a weak oil pricing environment. However, we expect EBITDA margins to increase to around 37% towards the end of the Trefis forecast period driven by demand for new high technology products and services, and the growing project and operational complexity of upstream exploration and production. We also expect synergies from Schlumberger's acquisition of Smith and Geoservices to have a positive impact on margins. If Schlumberger is able to increase EBITDA margins in the region to 42% as compared to our estimate of 37% at the end of the Trefis forecast period, this will provide an 8% upside to our price estimate for Schlumberger's stock. On the other hand if margins in the Middle East and Asia fall due to competitive pricing pressures to about 28% by the end of the Trefis forecast period, there could be an 10% downside to our price estimate.

Rig Count in Middle East/Asia: The total average rig count in the Middle East and Asia has rebounded from a low of 495 in 2009 to 660 rigs in 2014. However, we expect this number to decrease in 2015, owing to weaker upstream capital spending by oil and gas companies, although it should continue to increase by roughly 3% annually over the long term. The rig count is likely to be driven by higher activity in the Middle East, offshore Australia and the exploration for unconventional hydrocarbons such as shale gas in China. Upstream exploration is directly linked to the price of oil and gas as investments are linked to the cash flows of independent and integrated oil and gas companies. Should exploration efforts in the Middle East and Asia pick up as a result of a surge in oil and gas prices to the point that the rig count increases to 900 (or approximately 20% more than our estimate) by the end of the Trefis forecast period, there could be an upside of 6% to our price estimate for Schlumberger's stock.

For additional details, select a driver above or select a division from the interactive Trefis split for Schlumberger at the top of the page.

${header:summary}

Schlumberger provides upstream reservoir characterization and drilling and exploration services for the oil and gas industry. Schlumberger's services are required by intergrated oil companies such as Exxon Mobil, National Oil Companies (NOCs) like Saudi Aramco and independent producers to explore, develop and service their oil resources. The company has an extensive geographical reach, conducting business in over 80 countries and providing products and services for oil and gas exploration including seismic services, drilling and post-drilling services.

${header:sourcesofvalue}

We believe the Middle East/Asia and the North America divisions of Schlumberger are more valuable than the other geographical divisions primarily because of -

Large market for exploration and production services in North America

North America accounts for over 50% of the total rotary rig count published by Baker Hughes. While the Revenue per Rig is the lowest in this region, the size of the market in terms of the number of rigs exceeds the combined size of the other three geographic divisions of Latin America, Europe/CIS/ Africa and the Middle East/Asia. Much of the growth in the North American market has been coming from tight oil and shale gas exploration, which are service intensive activities that require constant drilling and stimulation to keep up production.

High margins in Middle East/Asia

The Middle East and Asia region has been the largest contributor to Schlumberger's earnings, despite having lower revenues than the North America division. Schlumberger's ability to command such high margins in this region contributes significantly to its overall stock price. In the long term, this region will continue to grow in importance as reserves in the OPEC region serve an increasingly large share of the global oil demand and also as offshore and unconventional exploration gain momentum in markets such as China and Australia.

${header:trends}

Oil Price Declines Will Hurt Upstream Activity In 2015

Oil prices have been trending lower since mid-2014, impacted by soaring output from U.S. shale fields, a recovery in oil production in Libya and higher supply and price cuts from members of the OPEC such as Saudi Arabia. There have been concerns on the demand side as well, given the lackluster global economic outlook and sluggish forecasts for global oil consumption growth. This is likely to result in weaker oilfield service activity, as oil and gas companies curtail upstream spending as their cash flows come under significant stress. Despite the current downturn, the
long-term fundamentals of the oilfield services sector remain robust, given that oil companies are more likely to defer spending rather than cancel spending outright. Additionally, hydrocarbon production is becoming increasingly expensive with the gradual decline in easily accessible conventional land and shallow waters reserves and oilfield services companies are playing an increasingly crucial role in the upstream value chain, given that they provide the technology and services to help E&P firms undertake complex, high-risk projects.

Exploration of deepwater and other remote sources of oil and gas

Increasingly over the past few years, major oil and gas finds have been in deepwater and other remote locations such as the CIS and Iraq. The exploitation of these sources adds tremendous logistical and technical complexities to the exploration projects that translate into higher revenues and lower competition for upstream products and services firms such as Schlumberger. Additionally, projects such as deepwater provide opportunities for longer term contracts and the ability to provide integrated services.

New oil and gas discoveries in Brazil and other Latin American countries

Several of the largest oil and gas discoveries in the past five years have been in Latin America, including several multi-billion barrel offshore finds in Brazil. These discoveries are attracting investments from local oil companies such as Petrobas as well as foreign oil majors such as Chevron and Petrochina. Exploration in this region is expected to improve Schlumberger's revenue and profit outlook in the region

Exploration for unconventional sources in Europe, Latin America, the Middle East and Asia

Exploration for unconventional sources such as shale and tight gas are expected to pick up in Argentina, Mexico, Poland, China and Saudi Arabia over the next several years, resulting in higher revenues and operating profits for Schlumberger in these regions.

Industry consolidation and higher service intensity in North America

The recent downturn has resulted in the consolidation of upstream products and the services industry in North America as many smaller players failed to survive the competitive pricing by established players such as Schlumberger. In addition to this, the shift towards unconventional activity and higher services intensity favors larger players which should result in better pricing for Schlumberger.

Efforts to arrest decline rates in ageing fields

Oil firms are investing in technology to help them reduce the decline rates seen in major fields over their lifetime. For instance, Mexico's Pemex has been engaged in efforts to arrest the decline in its Canterall fields while Saudi Aramco has also made it a priority to reduce the decline in its fields at 2-3% per year.

Growth In Spending Mix Skewed Towards NOC

According to Barclays Capital, while oil majors such as BP have been slowing down on their expansion plans as they focus on improving shareholder returns, national oil companies, particularly from regions such as Latin America and the Middle East, are likely to play a key role in driving overall spending growth. In the Middle East for example, total exploration and production spending is expected to rise by around 14% to close to $40 billion in 2014, led by an increase in spending by Saudi Aramco as well as the Kuwait Oil Co. In Latin America, spending is expected to rise by around 13% to around $84 billion, driven largely by increased spending from Venezuela’s state run oil firm PDVSA (which is expected to increase its capital spending by roughly 50%) and Mexico’s PEMEX.

Trefis Forecast Rationale for Annual Average Rig Count in Middle East / Asia

${header:what}

The ${forecast} is the annual average of the monthly count of the number of operational rigs in the region.

${header:historicals}

Global oil and gas exploration is driven by oil & gas prices. The ${forecast} touched 532 in 2008 as oil prices increased to record levels. In 2009, however, as prices declined, the count reached 495 in 2009 before recovering to 534 in 2010. The rig count grew further in 2011 to touch 549, as oil prices remained above $100 through much of the year. In 2013, the number stood at roughly 618, on the back of higher activity in markets such as Iraq and Australia. The number grew further in 2014 to around 660 rigs driven by growth in markets such as Saudi Arabia, Kuwait and Indonesia. While we expect to see a slight decline in the number in 2015, we expect it to rise to over 750 rigs by the end of our forecast period.

${header:rationale}

Trefis considered the following factors for its forecast:

${header:supporting}

Scope for further growth in the ${forecast}

According to the IEA, the Middle East’s share of the global oil supply will increase from the present 44% to 52% in 2030.

The Middle East has around 60% of the world’s proven reserves that are also financially the most attractive as they have low development, operational and refining costs compared to oil reserves from the other parts of the world.

The IEA forecasts that upstream exploration should see annual investments of around $450 billion till 2030 for supply to keep pace with the growth in demand. It is estimated that approximately 50% of the conventional oil production needed by 2020 is yet to developed or discovered.

Saudi Arabia is looking to explore more regions and plans to increase its exploration of unconventional resources

More fields are also opening up in Iraq as the country aims to ramp up its oil production over the next few years.

It is estimated that approximately 50% of the conventional oil production needed by 2020 is yet to be developed or discovered. By 2035 this figure is expected to increase to 70%, indicating a tremendous upside potential for exploration products and the services industry, which in turn will boost the rig count.

Increasing exploration for natural gas

IEA projections indicate that the demand for gas is expected to increase by 1.4 - 1.6% per annum till 2035. Other forecasts estimate annual growth rates of around 2% with non-OECD economies contributing the most to that growth.

Following the Japan nuclear crisis, countries may opt for an energy mix that would bolster demand for natural gas further increasing the rig count.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.

We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

NAVIGATION

CONNECT

DISCLAIMER

By using the Site, you agree to be bound by our Terms of
Use. Financial market data powered by Quotemedia.com.
Consensus EPS estimates are from QuoteMedia and are updated every weekday.
All rights reserved.